Substitution of Different Risk Management Strategies in Agriculture

The increased use of natural resources and the development of specialized agricultural production led to increased vulnerability of ecosystems to environmental stresses, volatility of crop yields and market fluctuations which highlights the issue of risk management. There is a wide range of strategies to reduce risks in agriculture however their arbitrary application can only create further uncertainty. The choice of risk management instruments in agricultural production depends on the main players in the market such as producers, governments, banks, insurance companies. The subject of risk management tools substitution arise when different decision making bodies introduce their favourite strategies without taking into consideration the actions of other market participants. The empirical analysis in developing the main lines of risk reduction and improving the efficiency of agricultural production suggests that some strategies are substitutive while the others are complementary. The selection of the alternatives is largely dependent on the functional and organizational structure of financial and credit relations in agricultural sector while the major problem is the lack of coordination between all acting parties because of which it is not always possible to obtain the first best solution. Using the data on criteria for determining the category of borrower by banks and indicators for assessing the creditworthiness of agricultural producers based on specific features of the external and internal environment it is possible to suggest methodology for development of more effective risk management system as well as banking credit, insurance scheme and state support for agricultural production.